It’s been amazing to watch Amazon’s transformation from online bookstore to e-commerce juggernaut.
Today, Amazon sells everything under the planet, fulfills e-commerce for thousands of companies, hosts major websites, enables crowdsourcing, and may even offer drone-driven product delivery someday.
The company is now worth more than $160 billion – that’s more than Target, Macy’s, Sears, Nordstrom, JCPenney, Kohl’s, Dillard’s, PetSmart, BestBuy, RadioShack, and Barnes & Noble . . . combined!
So you might think me crazy to declare that yes, Amazon is beatable. Before delving into Amazon-specific arguments, a history lesson is in order. A look at the last 20 years of retailing clearly proves that the 800-pound gorilla of today might be the 50-pound weakling of the future. Indeed, of the top 10 retailers of 1990, only four still ranked in the top ten as of 2012:
Indeed, some of the juggernauts of the 1990s are now either in bankruptcy or entirely out of business. This same observations, by the way, can be made about numerous other industries as well, from airlines (what happened to Pan-AM or TWA?) to finance (Lehmann Brothers? E.F. Hutton?).
Heck, there was a time in the search engine world where Yahoo and Excite.com were battling for web dominance! The point is this: what may seem like irreversible market dominance today can be gone tomorrow. There’s no reason to believe that Amazon is immune to this historical trend.
Amazon’s Strength: Customer Service
I believe there are three traits vital to e-commerce success: customer retention, employee retention, and vendor retention. Amazon excels at customer retention but is notoriously poor at the other two. For this reason, Amazon can be outflanked by competitors who are effective at all three disciplines. Let’s look at each of these retention efforts individually and discuss why they are important.
First, customer retention. There have been numerous studies that show that companies with great customer retention significantly outperform companies that churn through customers.
A great primer on this topic is The Loyalty Effect by Fredrick Reichheld (also the creator of Net Promoter Score). Reichheld’s data is stunning: happy, repeat customers spend more per order, require less customer service, and are most likely to recommend your business to their friends. Companies that have armies of satisfied customers are typically massively more profitable than companies that don’t.
Amazon does a fantastic job of customer service. They deliver their items on time, are very fair with returns, and offer low prices and often free shipping. From a consumer perspective, it’s hard not to love Amazon. Indeed, once you’ve got Amazon Prime (with its free two-day shipping on most items), it’s hard to shop anywhere else!
Amazon’s Tragic Flaw, Part I: Vendor Retention & Satisfaction
The vendor experience with Amazon is much different from that of the consumer. Recent news reports have exposed some of Amazon’s strong-arm tactics toward vendors.
For example, ever since book publisher Hachette refused to renegotiate pricing for e-books on Amazon, Amazon is now “charging more for its books and suggesting that readers might enjoy instead a book from another author. If customers for some reason persist and buy a Hachette book anyway, Amazon is saying it will take weeks to deliver it,” says author David Streitfeld in an article in the New York Times. This move was seen by many as Amazon using their weight to “bully” vendors to meet their demands. In the words of best-selling author James Patterson, speaking at a publishing industry trade show a couple of months ago:
Amazon seems to be out to control shopping in this country. This will ultimately have an effect on every grocery- and department-store chain, on every big-box store, and ultimately it will put thousands of mom-and-pop stores out of business. It just will, and I don’t see anybody writing about it, but that certainly sounds like the beginning of a monopoly to me. Amazon also, as you know, wants to control book selling, book buying and even book publishing, and that is a national tragedy.
And this is not an isolated incidence of conflict between Amazon and vendors. Over the last few years, Amazon has been attacked by vendors for everything from encouraging showrooming (going to your local store and then buying from Amazon), closing vendor accounts without explanation or recourse and using vendor data to negotiate direct deals with manufacturers, effectively competing against their vendors.
Indeed, vendor concerns are significant enough that antitrust and class-action lawsuits are being considered or have already been filed against the e-commerce giant.
Why does this matter? Well, first off, without vendors, an e-commerce company can’t sell anything (unless it makes everything itself, and that’s definitely not Amazon’s model). So hypothetically, if Amazon angers enough vendors, one of its greatest competitive strengths – that you can literally get anything you want on Amazon – might be in jeopardy.
Vendors are now partnering with Amazon with their eyes wide open. This means that vendors will be much more careful in reviewing and negotiating contracts, will do whatever they can to limit Amazon’s access to their data, and will – where possible – diversify their revenue to as many non-Amazon sources as possible. This sort of vendor resistance adds friction and costs (legal, marketing, and otherwise) to Amazon, thus reducing profit.
Amazon has so much power and elicits so much skepticism that there are surely some vendors who are working with Amazon only because they have to. If Amazon should one day encounter business turbulence and actually need vendors to stick with them during tough times, would it surprise anyone if vendors turned their back on Amazon?
So, rule number one of competing with Amazon is simple: delight your vendors. Build partnerships with them based on trust and symbiosis. You may be able to eke out better pricing, special offers, and preferential service that gives you an advantage.
Amazon’s Tragic Flaw, Part II: Employee Retention
Recent news stories have detailed the not-so-happy lives of Amazon employees. The headlines themselves are sufficient to tell the story:
You might argue that there are plenty of companies that have proven that business success can be achieved without incredible employee retention or satisfaction. Indeed, Wal-Mart is the number one retailer in the U.S., and the litany of articles outlining the difficult working conditions at Wal-Mart is massive.
And there are definitely similarities between Wal-Mart and Amazon. Indeed, given Amazon’s relentless pressure on vendors, ongoing efforts to automate logistics, and poor employee retention, one wonders whether Amazon is trying to copy Wal-Mart!
There is, however, one huge difference between Amazon and Wal-Mart: Amazon is heavily dependent on white-collar tech workers to build its e-commerce front-end, logistics systems, and customer databases. These are the “STEM” workers who are in incredibly short-supply. To keep these employees happy, tech firms now offer free food, free transportation, unlimited paid time off, free massages, free gyms, and dozens of other amazing benefits.
For in-demand tech superstars, money isn’t enough to keep your employees. Indeed, a recent survey of employees who changed jobs found that compensation was only the third most important factor. If Amazon can’t keep talented workers, will they be able to continue to create great technology? Fred Reichheld also notes that happy workers tend to create happy customers. If Amazon’s employees aren’t happy, this could have negative consequences on Amazon’s customer satisfaction, one of their greatest assets.
So, if you want to beat Amazon, a good starting point would be to recruit and retain the smartest tech brains in the world. Technology changes incredibly quickly – who knows, your brilliant tech team might come up with a new trick to outflank Amazon and cut into their market share!
Happy Customers + Happy Vendors + Happy Employees = Happy Profits!
While Amazon’s revenue continues to grow at a rapid clip, profit has been elusive. For Q1 2014, Amazon did $19.7 billion of revenue but only $47 million of post-tax income. That’s a net margin of .24%. In its most recent quarterly earnings announcement, the company reported a net loss of $126 million in the second quarter, even though sales were up 23% from the same period a year before.
Most companies would be subjected to intense Wall Street scrutiny for reporting almost no profit (or even a loss) quarter after quarter.
Amazon’s stock, however, continues to skyrocket. Amazon CEO Jeff Bezos has stated numerous times that he doesn’t care about profit margin, and, according to the authors of this Bloomberg Businessweek story, Wall Street has decided that “they’re willing to tolerate razor-thin or nonexistent profits in exchange for continued market share gains and a promise of windfall profits someday.”
This strategy of “grow first, profit later” always sounds good on paper, but I’d argue that it is lot easier to grow top-line revenue than bottom-line profit. After all, if you are willing to take much lower margins than your competitors, you can win customers on price all day long. But what happens when you decide to start actually making a reasonable profit – will your customers continue to be loyal?
An oft-cited corollary to Amazon is Costco. Costco pays its employees well, is fair (but tough) to vendors, and provides great customer service. The top-line revenue for Costco is similar to Amazon: $25.8 billion of revenue in Q2 2014. The bottom line, however, is significantly better: $479 million of post-tax income with net margin of 1.86% – that’s more than 7X better than Amazon. By the way, Zappos – the poster child of great service – was also doing around 1.7% net margin at the time it was acquired by Amazon!
To be clear: I’m not saying that Amazon will definitely disappear (or even decline) in the near future. Jeff Bezos is a brilliant man and has created an amazing company. Amazon is the company to beat in e-commerce, and that’s an accomplishment.
History tells us, however, that staying on the top in retail is pretty darn tough. Wow customers, be fair to vendors, and delight your employees and perhaps your company might someday compete with or beat Amazon!
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